Currency Exchange Rates: Determination and Forecasting

on Page 303 of Schweser - Study Session 4 from reading number 14.

Number 16, the answer is B – WHY?

Let’s go back to the problem:

Contract FX2001 is a 90 day forward contract initiated 60 days ago. The contract calls for purchase of CHF 200 million at an all in rate of USD 0.9832

my questions:

If it says the contract was initiated 60 days ago, so that means the investor purchased a 90 day forward 30 days ago. am i right here? It explicitly says that a 90 day contract was initiated 60 days ago. So with this, I would expect to use a locked in rate next to "90 day forward"


The explanation uses the 30 day forward.

and what i dont get is why are we discounting the difference? Don’t we want to get the value TODAY not 30 days ago?


Nope. The 90-day contract was initiated 60 days ago, not 30; there are 30 days left. Today’s 14/04/09, they entered into the forward contract on 14/02/08, and it expires on 14/05/09.

Because there are 30 days left till expiration, we would undo this transaction with a 30-day forward contract (to sell CHF). The exchange rate on that 30-day contract as well as the exchange rate on the initial 90-day contract (which has 30 days left) are for delivery in 30 days; if we want to know the value today we have to discount the difference back to today. I’d encourage you to draw a timeline with the initiation of the original forward contract, its expiration, today’s date, and today’s 30-day forward contract. It might make things easier to unravel.

You’re welcome.